FINANCE

Industry Focus Finance: How Will Mergers in the Factoring Business Affect Clothing Manufacturers?

In recent months, there has been some consolidation in the factoring and banking business, with CIT Group acquiring OneWest Bank and Sterling National Bank purchasing a factoring portfolio from First Capital Corp.

What do all these changes in the loan business mean for clothing makers trying to get financing to keep their companies going?

The California Apparel News recently spoke with several industry executives to get their take on the financial landscape.

With the recent mergers and acquisitions between banks and factors, how do you expect this to affect the factoring business? Will it make it more difficult or more expensive for manufacturers to get factored?

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

When a bank owns a factor, bank regulation can dictate what deals can get approved or not. Decisions are not necessarily based on the collateral or the people, which are two very important criteria for factoring and lending money.

As an independent factoring and finance company, Rosenthal & Rosenthal looks at the totality of the deal—not just the balance sheet and not just the profit and loss. We also take into account the story behind the deal, the people behind the deal and the performance of the collateral.

Over many years, banks have owned factors and banks have sold factors. For any individual deal, it may become more expensive or more difficult as that manufacturer needs to find replacement financing/factoring should the bank-owned factor want to exit the relationship—or not be able to increase the support as the business needs change.

However, Rosenthal has seen a large increase in our factoring business over the years, being able to provide the factoring and financing when the bank-owned factors are unable or unwilling to.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

The acquisition of factors by banks is not new to the factoring industry. This has been an ongoing process for some time. The effects of these acquisitions can be seen in various ways.

Some of the positive effects can be a lower cost of money for the factoring clients. Banks typically can borrow money from the Federal Reserve Bank at lower rates than privately held asset-based lenders as these ABLs have to borrow money from banks and do not have access to Federal Reserve money and rates.

In this regard, bank-owned factors can borrow money at a lower interest cost. Therefore, they are able to charge their clients a lower interest rate. These lower interest costs, if passed through to their clients, can be of great benefit to the apparel manufacturer, who is the ultimate borrower.

So the cost of factoring through a bank-owned factor can be cheaper than through a privately held factor. That said, just because the factor’s cost of funds is less than another factor’s does not mean every apparel manufacturer will see reduced rates. It still depends on the financial strength of the borrower. The financially stronger companies will always get the best deals with the lowest rates.

Another positive from a bank merging with a factor can be an opportunity for apparel manufacturers to take advantage of additional banking services that they might not have been able to obtain. For instance, having sweep accounts can minimize the apparel manufacturers’ borrowings and the related costs. There are many other services and products that banks provide to their clients that might make their day-to-day accounting and finance operations much easier.

In the past, privately held factoring companies have had a lot of flexibility in making lending decisions to their clients. And this is still the case today if a company needs an over advance, inventory lending or letters of credit.

The privately held factors have their own credit policies they set to follow. One of the potential negatives with having a bank-owned factor is with the government regulations the banks have to follow. What this means is that all loans are effectively graded. If an apparel manufacturer is too leveraged, then they could fall under regulatory scrutiny. This could lead to a reduced borrowing base, increased costs and fees or, at worst, an exit from the factor. This could also affect start-up companies who are thinly capitalized. They might not even meet the minimum requirements for lending.

For many apparel manufacturers, it might not make any difference if you are financed by a bank-owned factor or a privately held factor. But if you have a financially strong company you might be able to take advantage of lower costs and a variety of other services the bank might offer and save significant money.

If you are highly leveraged or have nominal equity or have unfortunately had some years with losses, you could be under great scrutiny and possibly even have to look for a new lender/factor.

Sunnie Kim, President and Chief Executive Officer, Hana Financial

As a matter of policy, Hana does not comment on any specific market transactions. Speaking in generalities, this seems to hark back to a decade and a half ago when many factors were typically owned by banks. However, I cannot say if this will be the beginning of a trend.

Theoretically, this would tend to reduce factors’ cost of funds and spur competition or increase their spreads. With respect to manufacturers looking to factor, interest costs may be even more competitive.

As a tradeoff, although interest costs may be more competitive, banks will require stricter credit standards in taking on and financing new prospects due to regulatory compliance standards typically imposed on banks.

Leigh Lones, Chief Executive, Bibby Financial Services

I don’t believe the recent mergers-and-acquisition activity will make it difficult for manufacturers to secure a factoring facility or cause pricing to increase.

According to the International Factoring Association report, 65 new factoring companies entered the market in 2014, suggesting the industry is growing and competition remains healthy.

A growing, competitive market normally translates into factors offering more favorable pricing and structures. While competition generally benefits the buyer, it can lead to confusion as businesses are bombarded with options and identifying the best fit can be difficult.

You are referring to CIT’s pending merger with OneWest Bank. CIT already has a bank-owned subsidiary, CIT Bank. So it is already competing on interest rates with other major bank-owned factors. For the largest apparel factoring clients that qualify for factoring with a bank-owned factor, they should benefit from this competition.

Recently, First Capital, a privately held company, closed its Los Angeles office when it sold its factoring division to Sterling National Bank of New York. Unfortunately, this was not a good thing for the local market. Very good, experienced factoring professionals lost their jobs as Sterling chose not to maintain a presence in Los Angeles. For First Capital’s former factored clients, they no longer have factoring professionals in Los Angeles to assist their needs. It also removed a factor with a Los Angeles office that filled a niche in the market.

Dave Reza, Senior Vice President/Western Region, Milberg Factors Inc.

Bank acquisitions/mergers of and between factors continue the trend of consolidation that the industry has witnessed over the past 20 years. As with other business sectors, this realignment brings with it opportunities for some and challenges for others.

The industry itself may benefit from bank-owned institutions reaching out to new industries beyond the traditional in order to achieve new business targets. On the other hand, banks may be challenged by regulatory oversight to maintain “business as usual.” While bank-owned factors may be able to bring a lower cost of funds to the pricing matrix, they also face additional or higher credit standards that accompany a more regulated loan environment.

Hence, either prospective or existing clients may start feeling greater pressure to comply with more-demanding credit/capital requirements. They may have to learn to live with less flexibility than they may have previously enjoyed with the same resource.

These dynamics could create a higher “bar” for those seeking to obtain factoring and/or to obtain more support from their existing resource. Alternatively, nonbank factors may be able to offer less-restrictive terms and also be a more stable platform as compared with their bank-owned brethren, where a poor quarter may result in a loan rating downgrade and, ultimately, less support.

Ironically, the reduction of factoring companies coupled with a decrease in the population of startups and/or existing potential clients has made competition even more fierce. Pricing has come down even while lending and debtor risk has increased.

To a certain extent, some factors (especially bank-owned) may require advance factoring clients to have greater amounts of capital than in the recent past, but overall I don’t see that it will be more expensive to get factoring services and/or financing.

Ken Wengrod, President, FTC Commercial Corp.

The current landscape of mergers and acquisitions between banks and factors will definitely bring change to the industry all around … which is good. What I’ve learned from watching different periods of economic transition over the years is that whenever there is turmoil, opportunities, competition and creativity rise.

There is plenty of capital around to support the industry, which allows the interest costs to not rise until the Fed gradually increases its interest rates. Potential factoring clients still have a way to flourish even in the current state of banking/factoring realignment. They need to be savvy about choosing the right factor.

When a bank acquires another factor, it generally ignores the importance of the factor-client relationships and only focuses on the economic scale. This neglect creates insecurities among the factored clients and breeds a possibility of another factor gaining an advantage and opening a dialog with these dissatisfied clients. This is why I think that the factoring rates will stay competitive.

The catch is that most factors lock their clients into one- or two-year contracts, which prevents the clients from enterprising within the situation. Clients should examine their exit strategies when they enter into a factoring relationship and make sure the relationship is amendable.

Some factors’ rates may appear low, but in actuality, their effective rates are higher due to not aggressively collecting the accounts receivable. This means that the clients’ loans are higher, and there is more interest being charged because the customer payments are used to liquidate the factors’ loans. These are the hidden costs of choosing a wrong factor. Clients tend to focus on the raw costs, but I think that more emphasis should be placed on the quality of the factor’s services.

The current mergers-and-acquisition activity should not make it more difficult for manufacturers to get factors. However, if they don’t pay attention, it will be more expensive to be factored.